As mentioned in the Feb 2016 dividend stock considerations post, we've been looking to add some US dividend stocks into our dividend portfolio. The goal is to add a stock or two in the consumer staples and/or consumer discretionary sectors to boost our portfolio allocation in these two sectors. Our exposure to these two sectors is a bit limited right now. While there are a lot of great dividend paying Canadian companies in the financial and oil & gas sectors, the choices are extremely limited when it comes to consumer staples/discretionary sectors. In order to increase our exposure to these sectors we need to look at the US and international markets.
So, we recently made the following purchase:
26 shares of Target Coropration (TGT)
Target Corporation (TGT)
Target Corporation is engaged in providing everyday essentials and fashionable, and differentiated merchandise at discounted prices. The Company offers its products through stores, online or through mobile devices. The Company sells an assortment of general merchandise and food through its store and digital channels. Its general merchandise stores offer an edited food assortment, including perishables, dry grocery, dairy and frozen items. Its urban format stores, CityTarget and TargetExpress, offer edited general merchandise and food assortments. Its digital channels include an assortment of general merchandise, including various items found in its stores, along with a complementary assortment, such as additional sizes and colors sold online. The Company’s brands include Archer Farms, Simply Balanced, Boots & Barkley, Circo, Embark, Gilligan & O’Malley, Market Pantry, Merona, Room Essentials, Smith & Hawken, Spritz and Sutton & Dodge. (From Google Finance)
Target currently has a dividend yield of 3.2%, a PE ratio of 15.63, a payout ratio of around 50%, and a debt/equity ratio of 1.1. When evaluating future growth potentials, Target has a solid PEG ratio of 1.42. The company is a Dividend Aristocrats with 48 years of dividend increase streak, a 1 year dividend growth rate of 13.7% and a 5 year dividend growth rate of 20.8%.
The stock price has seen a pull back of over 20% compared to its 52 week high. Since we are purchasing dividend stocks for the run, we like to purchase stocks when there's at least a 10% pull back. A 20% pullback indicates that this is a great buying opportunity, given the long dividend history and dividend growth rate.
Target has faced a few setbacks the last few years - the credit card hack and the Canadian expansion fiasco to name a couple. Target is trying to set aside these disasters and improving its business by becoming e more efficient at their core competencies. The company is doing this by selling their non-retail operations. At the end of 2015, Target sold their pharmacy and clinic business to CVS Health for approximately $1.9 billion. It's questionable whether this is a good move as this transaction removed about $500 million in sales for Q4 2015. I do like the idea that Target can now focus on their core competencies of being a retailer; CVS Health can focus on the pharmacy and clinic business within Target stores. The two companies can work closely together to improve customer satisfaction. Moving forward, Target needs to focus on getting better products and expanding their online platform to beat competitors like Wal-Mart, Costco, and Amazon. The retail space is fierce and competitive but I believe Target has a lot of experience in this space and will continue to excel.
I'm extremely pleased that we now own both Wal-Mart and Target. I'd love to one day add Costco in our portfolio as well. This purchase added $58.24 in our annual dividend income. Using a conservative dividend growth rate of 8% per year, in 15 years the annual dividend income will grow to over $180 if we didn't purchase more shares. This is why I love dividend growth. 🙂
What do you think about this purchase?